To The Editor: I hope it is not too late to express my concern over Sean Maher’s view of variable universal life in his article “Choose VUL For The Long Term” in the June 27 issue of National Underwriter. His article is full of fallacies which can severely hurt advisors and their clients.
I have read his article many times in the last few weeks to make sure my criticism is valid and deserves other readers’ attention. Apparently Mr. Maher forgets (ignores?) so many important considerations for choosing life insurance policies, such as a client’s personal traits, character and beliefs; a client’s family and social environment; a client’s job and income; a client’s wishes and plans; and the insurance company’s philosophy and business practices, etc. Instead, he makes up something (Table 1 and Table 2 in his article) to help his overblown push of VUL. By doing so, he draws readers’ (and clients’) attention from the vital aspects in our business to some seemingly important but faulty factors. I am afraid some readers (advisors) may be wrongly guided by his article to do something inappropriate unknowingly or to use his article with questionable intent.
For example, in Table 1 on “disclosures” of “cash value internal rate of return,” he puts down “full disclosure” for VUL and “calculable” for others. It looks like VUL is better than all others. But as whole life is calculable with early surrender penalty already taken into consideration, the “full disclosure” for VUL does not take that into account. Thus it is a misleading comparison and the “full disclosure” is with some important facts hidden.
Please note, the so-called disclosure is after the fact, not in advance. If the carrier and/or the fund manager does a lousy job, after seeing the policy quarterly or annual statement, the clients only can shake their heads or pay a heavy penalty to get out of the VUL policies. Therefore the “disclosure” is only good for marketing rhetoric but may not give clients much benefit.
Return, rate and rate of return are not the only things for disclosure, if disclosure is deemed so important. The excessive mortality deduction, the excessive frequent turnover of fund manager or portfolio, the complaints and lawsuits against the carrier and/or the fund manager, the aggressive underwriting practice (i.e., all clients will eventually share more mortality cost in the future) and a bunch of other information should be disclosed, too!
His Table 2 is more problematic. There it says VUL is for “lowest outlay of premiums.” It is plainly erroneous. At young ages, the outlay of premium for VUL seems very low. But at older ages, the outlay of premium will (will!) be outrageously high. If the client “manages and benchmarks” at young ages to achieve the “objective” for the “lowest outlay of premiums,” he or she will be deeply sorry later for not having fully utilized the consistent dollar cost averaging investment mechanism and the tax deferral provided by VUL with maximum allowable larger premium outlays in the early years. The rapidly increasing outlay of premiums at older ages will either kill the policy or kill the client with disappointment, aggravation and sense of being fooled by the “advisor” for so many years. It is too late to catch up.
The design or the existence of “lowest outlay of premiums” (at young ages) is, for proper purposes, to provide clients the flexibility when circumstance makes it difficult to pay larger premiums for some time (i.e., not for a long time or all the time) and to help start the policy with relatively lower premium but with the intention to pay much higher premium as soon as possible. (For example, the client has the ability to pay much higher premium several years later when mortgage is paid off or children are out of college.)
Unfortunately, too many carriers and advisors/agents have abused this feature. Because it is legally allowable to illustrate a VUL policy with 8%, or 10%, or even 12% return, the “advisors/agents” can easily sell the policies at very low premium outlays without telling the clients about the implications and the potential dangers.
VUL works best if continuously funded with large outlay of premiums. People who do not plan to pay or cannot pay relatively high premiums should not get into VUL in the first place. Unfortunately, in reality, I have seen too many clients sold by irresponsible advisors/agents with the low premiums for their VUL policies. I can see a storm is brewing to sweep over the life insurance industry brought by massive complaints and lawsuits when too many VUL clients finally discover that their policies are doomed to crash when they are getting older due to the unrealized performance assumptions over the years. If the advisors/agents do not want to become part of the complaints and lawsuit subjects, they had better make a hard effort to study VUL and sell VUL properly to the appropriate clients.
In a certain sense, or in certain situations, the actual cost of VUL can be very high and the whole life can be very low over the long haul. For instance, the regulatory and administrative costs for VUL are relatively higher than other forms of policies and the clients eventually bear the costs. (Who pays the costs of preparation, the printing and mailing of the telephone book-sized prospectus that every client throws into the garbage can?) I have seen some old universal life policies milked by carriers with comparatively very high mortality deductions. Clients are helpless with this “transparency.” I believe the same can happen to some VUL policies, sooner or later.
On the other hand, a good whole life policy well run by a reasonable and reputable carrier can be of low cost in the long run because the saving in cost (especially the mortality cost) and a great deal of extra gain above the policy design are returned to the clients. Of course, it is a different story for a lousy carrier or an unfair company. Therefore, choosing a good company is more imperative than thinking of “disclosure” or “lowest outlay of premiums.”
Besides, if the client has a limited budget at the earlier years but has a more ample budget some years later, universal life and whole life plus (convertible) term rider can also serve the purpose but with less volatility and less uncontrollability. Regardless of which policies, too low outlay of premiums for extended periods will inevitably cause problems at older ages.
I am amazed at Mr. Maher’s statement that “higher hypothetical long term (VUL) yields should reduce the amount of premiums required to fund future death benefits.” “Hypothetical” means it is assumed and not sure. “Should reduce” means for sure it will reduce. Here assumption unconditionally becomes fact! This is a typical scenario that too many VUL clients are led, or more accurately, misled, to believe their VUL policies will generate higher yields and will have great outcomes. Therefore, many of them are not aware of the many risks associated with their policies, especially with so many advisors/agents downplaying the risks while emphasizing the potential gains.
We should also note that, even if the VUL has higher yields in the long run, the real end result after many years of ups and downs is much different from that with the assumed homogeneously uniform and steady yields. Here is an analogy. Two people take in the same kind and same amount of food (same nutrition and same calories) every day, but one with no breakfast, small lunch and big dinner, while the other one with relatively even portions for breakfast, lunch and dinner. Which person do you think will have better health, more energy, higher spirit, higher productivity and better performance?
With my years of observation, study and experience, I set 6 criteria to determine the suitability for suggesting VUL to clients: The clients: (1) really understand the risks associated with VUL; (2) really are willing to bear those risks; (3) have the ability to bear the risks (both financially and mentally); (4) are willing to pay higher premiums regularly for a long time; (5) have some ideas about investments and the ability to make sensible arrangements; and (6) have the right temperament to work with the competent advisors/agents.
When talking about risks of VUL, most people only think of the volatility of the stock market. Actually there are a lot of other risks, such as the mismanagement and/or the incompetence of carrier and/or the fund manager. That means the client’s policy may do poorly even though the stock market is doing very well. I have analyzed many cases pertaining to VUL policies inappropriately sold to unsuitable clients. I have come to stark and sad conclusions: The main risks of VUL are not the stock market or incompetence of carrier or fund managers. They are the risks of the practice of carriers which design tricky and deceptive policies and tolerate or even encourage advisors/agents to sell them with questionable means; and the risks of fallacies, misconceptions, misinformation and ill advice given by the advisors/agents who unintentionally or intentionally misuse or abuse VUL policies; and the risks of the clients themselves who are naively mis-sold with the theme of “get rich quick with least cost ” and/or have no proper temperament or ability to take care of the policy.
Some frequently used fallacies are, for example: “you can assemble a portfolio to suit your investment objective,” “you can switch the funds any time if you want,” “if you can put your IRA/401(k) into the stock market, you should have no problem to put your life insurance into the stock market,” and “the stock market produced 11% average yield in the past 70 years.” (Statistics do not lie, but misuse of statistics is a lie!) Because of the limitation of time and space, I will not go into the detailed discussion of them. I just want to alert readers (marketers, advisors, agents) to be more prudent with VUL. Be careful of what we say and do. Take advantage of the good mechanism provided by VUL and avoid the traps built in VUL. Sell VUL to suitable people the right way.
People who do not plan to pay or cannot pay relatively high premiums should not get into VUL in the first place
When talking about risks of VUL, most people only think of the volatility of stock market, but there are a lot of other risks